What is Enterprise Risk Management?

From an unpredictable global pandemic to collapses of trusted banking institutions, the current business environment is impacted by a high degree of uncertainty and volatility. 

In this climate, organizations must remain diligent to combat challenges that can shake their foundation. The risks faced by companies can be security- and governance-related, financial, technological, environmental, and social. 

Companies of all sizes are subject to serious threats, and proactive risk management is needed in all organizations. Beyond upheavals such as the 2007–2008 financial crisis and COVID-19, major firms across various industries continue to succumb to threats and hazards. Industry giants like Silicon Valley Bank, Bed Bath & Beyond, Sears, Credit Suisse, and FTX have faced or met their demise. 

Failures like these illustrate the need for effective enterprise risk management (ERM). This article will define enterprise risk management, discuss its goals, and explain how organizations can embrace it to successfully navigate their challenges.

What is ERM: Understanding Enterprise Risk Management

ERM is a strategic approach employed by organizations to identify, assess, and address potential risks and opportunities on an organization-wide scale. 

ERM encompasses “the identification and prioritization of risks due to defined threats and the implementation of countermeasures to provide both a static risk posture and an effective dynamic response to active threats.” It both ensures a company’s preparation for threats and guides countermeasures against them.

ERM is a holistic approach that helps businesses build organizational awareness and adopt tactics that align with strategic goals at an organizational evel. Planning at this level based on risk is how organizations can ensure their ability to adapt and even grow in periods of uncertainty or rapid change. 

Traditional Risk Management vs. Enterprise Risk Management 

Traditional risk management (TRM) methodology views risks as entities that need to be simplified for effective management and treatment. TRM focuses on risks as function-specific and as something to be managed in silos. 

In the 1990s, companies came to reconsider this idea and shift to a perspective of examining risk interdependencies. The concept of ERM arose during this time period, amid a wave of incidents experienced across some financial institutions, such as Barings Bank, the savings and loan crisis, and the Indian stock market scam—that “rocked the financial world.” 

The more isolated nature of TRM methods proved to be inadequate when dealing with the all-encompassing nature of threats posed to organizations. By the early 2000s, the idea of ERM took shape.

The Goals of Enterprise Risk Management

Risk managers evaluate their company’s risk tolerance and develop strategies to manage adverse events proactively and effectively in an organization, from top to bottom. Here’s what ERM strives to achieve:

• Holistic approach: Address all security, financial, strategic, governance, operational, reporting, compliance, and reputational risks along with their interconnected impacts within an organization. 
• Build a culture of risk: Foster an overall understanding of risk in various aspects of day-to-day operations and a readiness to tackle the complexities that may arise. 
• Risk portfolio evaluation: Review risk portfolio in relation to key internal and external factors, systems, and stakeholder interests.
• Awareness that individual risks compound: Acknowledge that the collective impact of separate risks throughout the organization may result in an overall risk exposure greater than the sum of its parts. 
• Have a process in place: Establish an organized method to handle all types of risks, whether qualitative or quantitative.
• Use risk management to your advantage: Stay ahead of the competition through successful risk management that can lead to greater organizational flexibility and adaptability in uncertain times.  
• Make it vital: Aim to integrate risk management into all major decision-making processes within the company.

Why Organizations Should Embrace Enterprise Risk Management

Many of the major disruptions of the last few decades (the dot-com bubble, the global financial crisis of 2007–2008, COVID-19, worldwide lockdowns, etc.) have caught many professionals by surprise and have had enormous macroeconomic consequences. 

One of the notable points about the global financial crisis in particular was its evolution as a liquidity crisis. It started as a series of risks and escalated into a major global meltdown. The liquidity problem unfolded into a complex web of broader issues. 

Moreover, scams and scandals proliferate. Enron, WorldCom, Satyam, Emission-gate, and Wirecard have left an indelible mark on the business world. According to a study of 129 articles addressing ERM benefits in the Journal of Finance and Banking Review, “These are not unavoidable minor infractions but a direct consequence of poor corporate governance.” Enterprise risk management can establish internal controls, audits, monitoring, and a risk-aware culture to mitigate scandals like these.

ERM can be significantly impactful, leading to enhanced cost efficiency and profitability, improved decision-making processes, transparent communication about risks, competitive advantage, more effective allocation of resources, increased organizational value, and overall bolstered performance.

But there’s much work to be done. A global survey of 2,842 risk managers, executives, and talent professionals identified the top current and future risk as cyberattack or data breach. Yet “only 13 percent of respondents say they have quantified cyber risk, and [only] 24 percent say they have developed risk management plans.” 

Take Your Risk Management Career to the Next Level

Learn more about enterprise risk management and the vital role it plays in helping organizations survive and thrive. Start or advance your career in the field with the online Master of Enterprise Risk Management degree program from Wake Forest University’s School of Professional Studies (SPS). 

You will also explore topics related to governance, compliance systems, and financial planning as well as emerging issues related to sustainability, technology, artificial intelligence, machine learning, cybersecurity, and more. 

Request information today to get started.